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The next ASX 200 stock that can pay a special dividend in the near-term

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The prospect of a special dividend is likely to excite investors as we are living in a period of dividend cuts!

You only need to look at ASX banks to understand the distribution gloom. It was only yesterday that Australia and New Zealand Banking GrpLtd (ASX: ANZ) declared a 35 cents final dividend, which is less than half of the 80 cents it paid last year.

But the cash outlook for ASX mining stocks could not be more different. I am not even talking about iron ore majors like the Fortescue Metals Group Limited (ASX: FMG) share price or Rio Tinto Limited (ASX: RIO) share price.

Special dividend could boost the IGO share price

These stocks may be well placed to undertake a capital return in 2021, but there’s another lesser known candidate that could pull a dividend rabbit from its hat.

This miner is the IGO Ltd (ASX: IGO) share price. UBS believes the nickel miner could undertake a capital return imminently.

The broker’s bullish call follows IGO’s quarterly update, which was well ahead of expectations. Production and costs were better than expected at two of IGO’s key projects – Tropicana and Nova.

More cash than projects

This means IGO is flushed with cash. While some of this is likely to be put towards an acquisition to expand its nickel reserves (Nova’s mine life only runs for around six years), IGO should have some leftover.

The excess cash may be either applied to a share buyback given the underperforming IGO share price, or be paid out to shareholders.

“IGO has A$509m of net cash, this translates to ~A$0.85ps or ~20% of the share price,” said UBS.

“Part of this may be applied to M&A opportunities…. But we think there will remain surplus cash to consider a step change in returns. Especially considering the ~15% [free cash flow] yield IGO is generating.”  

IGO shareholder returns in focus

IGO indicated previously that it will be reviewing shareholder returns before January 2021. Investors can’t rule out a special dividend or some other capital return initiative.

On the other hand, a share buyback might make more sense as UBS pointed to the IGO share price trading at around a 20% discount to its valuation.

Is the IGO share price a buy?

The broker is recommending IGO as a “buy” with a 12-month price target of $5.45 a share.

UBS has also pencilled in a close to 30% increase in FY21 dividend to 14 cents a share, although this falls back to 12 cents in the following year.

That’s still not a bad outcome for what I consider to be an undervalued stock.

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Returns As of 6th October 2020

Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited and Rio Tinto Ltd. Connect with me on Twitter @brenlau.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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